1. This consolidated reference by the Income-tax Appellate Tribunal relates to penalty proceedings in connection with the assessments for two different years on the same assessee. The penalties were levied in the first instance by the IAC. He dealt with the two assessment years independently in two separate orders of penalties in a common order. They discussed the case for penalty in the two years almost in identical terms. We would, however, prefer to consider the penalties separately in respect of each assessment year.
2. The assessee involved in the penalty proceeding is a registered partnership firm. The two connected assessments were for 1963-64 and 1964-65, respectively. The penalty for 1963-64 was invoked in the reassessment proceedings. The penalty for 1964-65 was involved in the original assessment itself. For 1963-64, the assessee's original return in the original assessment proceedings disclosed an income of Rs. 47,086. The accompanying statements showed that this income was derived by the assessee from the carrying on of a business in the manufacture and sale of artsilk textiles. The assessee's accounts contained entries to show that artsilk yarn was imported form abroad under import permits, manufactured in the assessee's looms as textiles and, thereafter, sold for a price in the market. The ITO accepted the nature of the business transactions as disclosed by the assessee's accounts. He then determined the assessee's taxable income substantially on the basis of the assessee's return. The assessment was completed by the ITO on December 21, 1963, on a total income of Rs. 52,014 after some miscellaneous additions were made to the income returned. Substantially this, assessment was reopened on the ground that income had escaped assessment. In response to the notice of reassessment issued by the ITO, the assess filed a return disclosing an income of Rs. 58, 291. A few months before the reopening of the assessment, the assessee had filed a petition before the Commissioner of Income-tax under s. 271(4A) of the Act. In that petition, the to purported to voluntarily disclose, inter alia, certain income over and above that which had been already assessed for the year 1963-64. the assessee clearly admitted that in the accounts produced and in the returns filed by it in the original assessment it was made to appear that the business being carried on by it was one in the import of art-silk, dyes and machinery and their subsequent commercial exploitation by way of manufacture of finished textile goods and sale of such goods in the open market. The assessee hastened to add that in point of fact, however, such was not the case. It was admitted that far from utilising the imported art-silk yarn for manufacturing finished textiles, the assessee had trafficked in the import licences as such or resold of the imported yarn without manufacturing them into fabrics. Having disclosed the real nature and course of its business, the assessed proceeded to admit that the books of account maintained by it did not disclose the real state of affairs, but carried fabricated entries making it appear that the assessee was carrying on a regular business of manufacture of imported art-silk yarn into textile goods. The assessee further admitted in its disclosure petition that the books of account did not exhibit the sale of licences or imported stock or the profit realised on such sales. The assessee explained that in the way the books of account were written up, they had to carry cash credit entries by way of adjustment in order to make the credit and debit sides balance.
3. Having set out these fetch, the assessee proceeded to enter, in a separate statement, the figures showing the actual profits realised in the direct sake of import licence or imported art-silk yarn. The assessee wound up the disclosure petition by assuring its co-operation with the Department in the matter of finalisation of the assessment, with a request that penalty proceedings may be waived.
4. As we have earlier observed, it was after the receipt of this voluntary disclosure petition that the assessee filed a return in response to the ITO's notice under s. 148 of the Act reopening the assessment for 1963-64. As we have earlier mentioned, in the return which it filed following the notice of reassessment, the assessee again furnished a return of profit more or less adopting the figure at which the original assessment had been completed. In that return, the assessee did not disclose the income from the sale of import licences and the sale of imported art-silk yarn in respect of which it had made admissions in its disclosure petition dated May 25, 1965. However, before the ITO could proceed with the reassessment, the assessee filed a revised return. In this return, the assessee incorporated the figures furnished in the voluntary disclosure petition as representing the estimated profits realised by the assessee on its direct sale of import permits permits and direct sale of imported yarn. The ITO completed the reassessment for this year 1963-64 acting on the admissions made by the assessee in the voluntary disclosure petition. He proceeded on the basis that the assessee derived its profits only by sale of import permits and sale of imported art-silk yarn without subjecting such yarn to any manufacturing process. He did not, however, accept the revised return filed by the assessee in the course of reassessment proceedings as disclosing the correct income from sake of import permits. He rejected the basis of the assessee's estimate of the profit margin in its sale of import permits. Having discarded the assessee's estimated figures, the ITO determined the income from the assessee's business of sale of import permits at Rs. 98,042 based on his own estimate of the probable range of profit in such transaction of trafficking in permits. It was, on this basis, that the ITO raised the tax demand in the reassessment for 1963-64. He followed it up by initiating for the levy of penalty under s. 271(1)(c) of the Act. These proceedings were in turn referred to the IAC.
5. The IAC referred to the confession made by the assessee to the effect that its books of account were unreliable and the profits which were returned by it on the basis of the books of account were not correct profits and that the assessment must properly be made on the transactions of sale of import permits and outright sale of art-silk yarn in the imported condition without putting the yarn to manufacture. The IAC held that on the very face of these admissions, the assessee was clearly guilty of concealment of income. He held that when the assessee had filed its return in October, 1963, in the course of the original assessment proceedings, it did not disclose the true state of affairs, but relied on bogus entries of purchases and sales passed as genuine entries in the books of account. The fact that licences had been sold outside the books of account had also not been disclosed by the assessee to the ITO at the time of the original assessment. In those circumstances, the IAC was not prepared to absolve the assessee of the guilt of concealment of income, merely because subsequent to the reopening of the assessment, the assessee had come forward with a disclosure of the real state of affairs. The IAC accordingly made an order of penalty under s. 271(1)(c) of the Act.
6. On appeal by the assessee, as we earlier pointed out, the Tribunal dealt with the subject-matter of penalty for this year as being of an identical kind as the subject-matter of penalty for the succeeding assessment year 1964-65. The Tribunal referred, in the main, to the voluntary disclosure petition filed by the assessee before the income-tax authorities on May 25, 1965. The Tribunal pointed out that when the assessment was reopened by the ITO, the assessee filed a revised return in which it adopted the figures which it had set out in the voluntary disclosure petition and it did not stick to its original returne which was based on its discredited accounts. According to the Tribunal, when once this revised return was filed on the basis of the estimate made by the assessee of its income by sale of import licence, those figures were enhanced by the ITO when he finalised the reassessment proceedings. According to the Tribunal, the ultimate reassessment only showed that in the place of the assessee's estimated figure, a higher figure, according to the ITO's own estimate, was substituted. The Tribunal regarded the voluntary disclosure petition dated May 25, 1965, as an important factor in considering the question of concealment of income on the part of the assessee. The Tribunal also took note of the fact that the officer himself had only substituted one estimated figure for another in completing the assessment. On this reasoning, the Tribunal held that there was no case for imposition of penalty on the assessee for this assessment year. The Tribunal, accordingly, cancelled the penalty for 1963-64.
7. We do not agree with the reasoning of the Tribunal. The Tribunal had clearly overlooked that the assessee was sought to be penalised not with respect to what it had furnished in its return of income in the reassessment proceedings, or even its revised return in the same proceedings, by way of estimate of the profits on sale of import licenses. On the contrary, the penalty was directed against the assessee for its having suppressed and concealed its income in the original return which it had field on October 15, 1963, wherein it had disclosed only an income of Rs. 47,086 making it appear that that income was derived by it from a business of manufacturing finished textile goods from out of art-silk yarn imported from abroad by utilisation of import permits. It was this original return filed by the assessee in the original assessment proceedings which was pinpointed in the order of penalty passed by the IAC. He had clearly referred to the assessee's subsequent repudiation of its accounts and its original return. He had referred to the assessee's disclosure petition and its clear admission both in that petition and in the course of the reassessment proceedings that its original return as well as the accounts on which it was based did not disclose the true state of affairs. It is this self-confessed concealment on the part of the assessee in its original return which was was highlighted by the IAC. The Tribunal's order has singly omitted to make any reference to the original return and the veracity of the particulars of income declared therein as an important ingredient in the proceedings for penalty under s. 271(1)(c) of the Act. We are satisfied that, on the assessee's own showing, the filing of its original return for 1963-64 was an act of deliberate concealment of income and it did call for a penalty. The Tribunal was not warranted in cancelling the penalty on any account whatsoever. We, therefore, have to hold that the Tribunal was in error in setting aside the order of penalty for 1963-64. It ought to have confirmed the order passed by the IAC. We may add that our decision on this part of the reference is based on the ruling of the Supreme Court in Malbury & Bros v. CIT : 51ITR295(SC) .
8. We now turn to the penalty proceedings for 1964-65. We may at once observe that this is a different cup of tea altogether. In contrast to the proceedings for the earlier assessment year 1963-64, the assessee disclosed in its return the profits it derived from the sale of licences and art-silk yarn. The figures furnished by the assessee were on the basis of estimated profit which it set out as aggregating to Rs. 77,924, according to the revised return filed by the assessee for that year. The ITO estimated it at Rd. 1,47,500. In the penalty proceedings which were initiated for the assessment year, the IAC held that the assessee must be held to have concealed the income even though it had disclosed the fact regarding the sale of licences even before any detection was made by the Income-tax Department. According to the IAC, even though the assessee had admitted its books of account to be not genuine and it had accepted the real course of its business to involve only sale of licences, yet the actual profits disclosed by the assessee in its revised return cannot be accepted as true profits since the assessee did not reveal the particulars of person to whom the licences were sold and at what precise rates, nor were any details given regarding the brokers who had arranged the deals. For these reasons, the IAC held that penalty was called for and levied a penalty of Rs. 12,000.
9. On appeal by the assessee, the Tribunal considered the question form two angles. One was to see what part the voluntary disclosure petition played both in the assessment proceedings and in the penalty proceedings. The other was to find out whether the assessee can be regarded as guilty of fraud or wilful neglect while it had filed its revised return on the basis of the estimate of income from sale of import licences. On the first aspect, the Tribunal observed that the assessee had voluntarily disclosed the fact of its having sold the import licences and derived income therefrom. In the opinion of the Tribunal, this fact cannot be lightly brushed aside in the context of the penalty proceedings. On the question of the income disclosed in this year's revised return, the Tribunal observed that the assessee entered the figures only by way of an estimate. The Tribunal noticed the fact that the one and only criticism levelled by the IAC was that, while furnishing the figures of profits on the sale of import licences, the assessee had not, at the same time, disclosed to the Department the particulars of the persons to whom the licences were sold, the rates at which they were sold and other details.
10. While the Tribunal accepted this comment of the IAC, it could not overlook that the assessment, as completed by the ITO, was itself by way of an estimate of the margin of profit which might have been realised by the assessee in the sale of import licences. All that this involved, therefore, was that the ITO substituted his own estimate in the place of the assessee's estimate. This process, according to the Tribunal, did not involve any concealment of income, nor even any fraud of wilful neglect on the part of the assessee in the matter of disclosure of its income at a figure less than that at which it was ultimately assessed on the basis of the officer's estimate. In this view, the Tribunal cancelled the penalty for this assessment year 1964-65.
11. We have considered the order of the Tribunal from the point of view both of the requirements of s. 271(1)(c) and of the particular provisions contained in the Explanation to that provision. The clear finding of the Tribunal on both aspects was that the assessee in its voluntary disclosure proceedings had in fact disclosed not only the true nature of the income, but also the true nature of the transactions from out of which the income was derived, and hence, the mere fact that it had rendered its revised return on the basis of an estimate cannot be regarded as involving any concealment, on its part, of the income or as a fraud or wilful neglect in the matter of disclosure of its income. We are, therefore, in agreement with the Tribunal in its decision to cancel the penalty.
12. Mr. Jayaraman, the learned standing counsel for the Income-tax Department, submitted that the Tribunal had not properly applied the substantive provision of s. 271(1)(c), much less the provisions of the Explanation to that section. According to the learned counsel, the Tribunal had missed the fact that even for the year 1964-65 the assessee had, in point of fact, filed the original return in which it had disclosed its income only on the basis of its accounts which, even according to the assessee's own admission, did not reflect the true state of affairs. It was only in a revised return which the assessee subsequently filed in the course of the assessment proceedings, that the assessee had made a clean breast of the facts and disclosed the income derived by it from the sale of import licences. Even while doing so, the learned counsel pointed out, the assessee had not cared to report the correct income accurately by reference to the particulars of the purchases, the rates at which the sales of import licences were effected and other vital details having a bearing on the assessment of the income. Learned counsel submitted that these matters of importance had not been given proper consideration by the Tribunal.
13. We have already summarised the findings of the tribunal. We cannot say that the consideration urged by the Department's standing counsel had not been brought to bear in the discussion of the case by the Tribunal. The learned standing counsel further submitted that even the filling of the revised return would not absolve the assessee from liability to penalty if the original return contained inaccurate particulars of income or omission of income amounting to concealment. He referred to CIT v. J.K.A. Subra maniya Chettiar : 110ITR602(Mad) . He pointed out that a part of the reasoning of the Tribunal were influenced by an earlier decision of this court in CIT v. Ramdas Pharmacy : 77ITR276(Mad) , to which they made a pointed reference in their order. To the extent that the Tribunal head relied on the earlier decision, the learned counsel submitted, there has been a misdirection in law on the part of the Tribunal. In our opinion, it is unnecessary for us to go into the applicability of the decisions cited. We have referred to the reasoning of the Tribunal which were directed to examining both the aspects of the penalty, namely, whether there was in fact any evidence of concealment and whether the assessee was guilty of fraud of wilful neglect. While examining matters of this kind, it is not very material to find out what function in law a revised return catrually fulfils. The Tribunal did go into all the facts of the case for arriving at its conclusion that the disclosure made by the assessee was full and voluntary and there was no element of fraud or neglect in the conduct of the assessee in the course of the assessment proceedings. We are, therefore, satisfied that the order of the Tribunal, in so far as this assessment year is concerned, must be upheld.
14. The question of law which is referred to us by the Tribunal is as follows :
'Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in cancelling the penalty under section 271(1)(c) of the Income-tax Act, 1961 ?'
15. For the reasons we have earlier set out, our answer to the question would be as follows : The Tribunal was right in cancelling the penalty under s. 271(1)(c) of the I T Act, 1961, for the assessment year 1964-65, but the Tribunal was not right in cancelling the penalty for the assessment year 1963-64. Having regard to the results of this reference, there will be no order as to costs.